Question

On January 1, 2021, Ithaca Corp. purchases Cortland Inc. bonds that have a face value of $330,000. The Cortland bonds have a stated interest rate of 5%. Interest is paid semiannually on June 30 and December 31, and the bonds mature in 10 years. For bonds of similar risk and maturity, the market yield on particular dates is as follows: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

January 1, 2021	11.0	%
June 30, 2021	12.0	%
December 31, 2021	14.0	%

Required:

1A - Bond fair value :
1. Calculate the price Ithaca would have paid for the Cortland bonds on January 1, 2021 (ignoring brokerage fees), and prepare a journal entry to record the purchase.
2. Prepare all appropriate journal entries related to the bond investment during 2021, assuming Ithaca accounts for the bonds as a held-to-maturity investment. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.
3. Prepare all appropriate journal entries related to the bond investment during 2021, assuming that Ithaca chose the fair value option when the bonds were purchased, and that Ithaca determines fair value of the bonds semiannually. Ithaca calculates interest revenue at the effective interest rate as of the date it purchased the bonds.

Answer 1

1.

Semiannual coupon = $ 330,000 x 5 % x 1/2 = $ 8,250

i = 11 % x 1/2 = 5.5 %

n = 10 x 2 = 20

PVA _{5.5%, n=20} = [ { 1 - ( 1 / 1.055 ) ²⁰ } / 0.055 ] = 11.9504

PV _{5.5% , n=20} = ( 1 / 1.055 ) = 0.3427

Present value of the bonds = $ 8,250 x 11.9504 + $ 330,000 x 0.3427 = $ 98,590.80 + $ 113,091 = $ 211,681.80

Date	Account Titles	Debit	Credit
		$	$
Jan 1, 2021	Investment in Bonds Receivable	330,000
	Discount on Bonds		118,320
	Cash		211,680

2.

Date	Account Titles	Debit	Credit
		$	$
June 30, 2021	Cash	8,250
	Discount on Bonds	3,392
	Interest Revenue ( 211,680 x 5.5 % )		11,642
June 30, 2021	No journal entry required	0	0
December 31, 2021	Cash	8,250
	Discount on Bonds	3,579
	Interest Revenue ( 211,680 + 3,392) x 5.5 %		11,829
December 31, 2021	No journal entry required	0	0

3. Fair value on June 30, 2021 =  $ 8,250 x [ { 1 - ( 1 / 1.06 ) ¹⁹ } / 0.06 ] + $ 330,000 x ( 1 / 1.06 ) ¹⁹ = 92,054.46 + $ 109,069.29 = $ 201,123.75

Fair value of the bonds on Dec 31, 2021 = $ 8,250 x 10.0591 + $ 330,000 x 0.2959 = $ 82,987.58 + $ 97,647 = $ 180,634.58

Date	Account Titles	Debit	Credit
		$	$
June 30, 2021	Cash	8,250
	Discount on Bonds	3,392
	Interest Revenue		11,642
June 30, 2021	Unrealized holding loss on Bonds Receivable	13,948
	Fair Value Adjustment		13,948
December 31, 2021	Cash	8,250
	Discount on Bonds	3,579
	Interest Revenue		11,829
December 31, 2021	Unrealized Holding Loss on Bonds Receivable	24,068
	Fair Value Adjustment		24,068